Personally I just buy a new computer when I want the latest version of Windows because it's a LOT cheaper that way. With the exception of Office, Project, and Visio all the software I use is free. I have no problems with free software... there's a lot of quality stuff out there that you don't have to pay a penny for. It just takes some trial and error to find the right stuff.
As for the non-free software on my computer it was all bought at a good discount. Microsoft gives out discounts these days like crazy... they know everyone can't afford several hundred dollars for their software and they would rather those people actually buy the software at a discounted rate than pirate it.
I think what really drives people to pirate software though is greed. They want to have the absolute best in everything whether or not they can afford it much less actually NEED it. Take Adobe Photoshop for example. That's one of the most pirated pieces of software out there, and why? How many of these people really need advanced photo editing features that aren't covered in free pieces of software like Paint.Net or Gimp?
The only thing I make an exception for is old versions of Windows. If you have an older computer it's not smart to throw a recent version of Windows on there and it's impossible to buy the old versions retail any more, although you might luck out and find a used copy for sale. Otherwise... I don't get pirating Vista and 7 and the like. It's not like they're going to run better than the old operating system you had on the machine (chances are they will run worse and may even have problems with the hardware as well) and you're really better off buying a new computer that already has them pre-installed and is guaranteed to have the right hardware to run them.